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Snap-on Continues to Benefit From Strengthening Vehicle Repair Demand

a strong brand reputation among repair professionals. Customers value Snap-on’s high-quality and strong performing products, in addition to its high-touch mobile van network. 

The company’s strategy focuses on providing technicians, shop owners, and dealerships a full line of products, ranging from tools to diagnostic and software solutions. Increasing vehicle complexity will be a tailwind for diagnostic sales as auto manufacturers are already tapping the company to develop new tools to service new EV models. We think repair work will shift away from engines to batteries, sensors, wiring, and advanced driver assistance systems. 

Snap-on has exposure to end markets that have attractive tailwinds. In automotive, we think demand for vehicle repair work will be strong in the near term, largely due to vehicle owners taking in their cars for overdue servicing. Additionally, we believe the high average age of vehicles will support demand for repair work to keep them on the road. On the commercial and industrial side, end markets are starting to pick up in activity; which we think means an increase in repair work for heavy-duty vehicles, planes, and heavy machinery.

Financial Strength

Snap-on maintains a sound balance sheet. The industrial business does not hold any debt, but the debt balance of the finance arm stood at $1.7 billion in 2020, along with $2.1 billion in finance and contract receivables. In terms of liquidity, we believe the company’s solid cash balance of over $900 million can help it quickly react to a changing operating environment as well as meet any near-term debt obligations from its financial services business. In addition, we also find comfort in Snap-on’s ability to access $800 million in credit facilities. Snap-on’s solid balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth but also returns cash to shareholders via dividends and share repurchases.We believe Snap-on can generate solid free cash flow throughout the economic cycle. We expect the company to generate over $800 million in free cash flow in our midcycle year, supporting its ability to return its free cash flow to shareholders through dividends and share repurchases. 

Bulls Say

  • The growth in vehicle miles driven increases the wear and tear on vehicles, requiring more maintenance and repair work to keep them on the road, benefiting Snapon. 
  • Auto manufacturers continue to tap Snap-on to create new tools and products to service new EV models. This alleviates concerns that EV adoption will threaten Snap-on’s viability. 
  • Sales representatives can add new customers on their designated service routes, increasing revenue per franchise.

Company Profile

Snap-on is a manufacturer of premium tools and software for professional technicians. Hand tools are sold through franchisee-operated mobile vans that serve auto technicians who purchase tools at their own expense. A unique element of its business model is that franchisees bear significant risk, as they must invest in the mobile van, inventory, and software. At the same time, franchisees extend personal credit directly to technicians on an individual tool basis. Snap-on currently operates three segments—repair systems and information, commercial and industrial, and tools. The company’s finance arm provides financing to franchisees to run their operations, which includes offering loans and leases for mobile vans.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Philosophy Shares Technical Picks

AT&T Delivers Solid Customer Growth During Q3 as Content and Network Investments Ramp Up

AT&T also benefits from its ownership of deep network infrastructure across much of the U.S. and its ability to provide a range of telecom services, particularly among enterprise customers. The plan to extend fiber to 3 million homes and businesses annually through at least 2025 builds on this position and should allow it to serve those locations directly and enhance wireless coverage in the surrounding areas. 

AT&T is also positioned to benefit as Dish builds out a wireless network as the firms recently signed a 10-year wholesale agreement that generates revenue for AT&T and gives it access to Dish spectrum. AT&T shareholders will own 71% of the new Warner Bros. Discovery. Warner remains a media powerhouse in its own right, with a deep content library and the ability to reach audiences across a wide variety of platforms. The firm’s direct-to-consumer plans around HBO Max are gaining momentum, which should nicely augment and eventually supplant traditional distribution channels like cable TV. Adding Discovery’s non-scripted prowess and international presence should give the new firm wider options to craft service offerings. 

Wireless customer additions were impressively strong

AT&T’s third quarter earnings displayed several of the same themes as the last few quarters: solid momentum in the wireless business, continued growth at HBO Max, and steady gains in consumer broadband, set amid financial complexity as management deconstructs the firm’s former strategy. AT&T added 928,000 net postpaid phone customers, by far its strongest quarter of the past decade, leaving its base nearly 5% bigger than a year ago. Prepaid net customer growth (351,000) was also the strongest since 2018. Average revenue per postpaid phone customer declined 0.6% year over year as the amortization of phone discounts hits this metric.

HBO Max added 1.9 million net new customers, a sharp slowdown versus past three quarters. With several European launches coming, Warner should easily hit its target of 70 million-73 million global Max customers by the end of the year. As a result, the WarnerMedia EBITDA margin was stable at 26%. On a cash basis, however, content investment has ramped up sharply during 2021, with cash spending year to date increasing more than $4 billion versus the first three quarters of 2020. Total revenue declined 5.7% year over year due to the spinoff of the DirecTV television business during the quarter. Adjusted EBITDA declined only 2.2%, however, reflecting strength across AT&T’s major operating segments. Free cash flow has totaled $18.0 billion thus far in 2021, down from $19.8 billion the year before.

Financial Strength

AT&T ended 2020 with net debt of $148 billion, down from $177 billion immediately after the Time Warner acquisition closed in mid-2018. The firm’s purchase of C-band spectrum for $23 billion, excluding around $4 billion of future clearing and relocation costs, pushed the net debt load back up to $168 billion, taking net leverage to 3.2 times EBITDA from 2.7 times. In addition, the firm has issued more than $5 billion of general preferred shares. The WarnerMedia spin-off will take $43 billion of debt with it, taking AT&T’s net debt to about $125 billion, which management expects will shake out in the range of 2.6 times EBITDA. The firm will use the Warner spin-off to adjust its dividend policy, targeting a payout of around 40% of free cash flow, down from more than 60% in 2020, leaving substantial excess cash to reduce leverage or take advantage of opportunities, including share repurchases. In total, management will target a payout of around $8 billion-$9 billion annually, down from nearly $15 billion in 2020.

Bulls Say’s

  • AT&T has pulled together assets no telecom company can match. The firm has direct contact with more than 170 million customers across various products, providing an opportunity to build deeper relationships.
  • Within the wireless business, AT&T holds the scale needed to remain a strong competitor over the long term. With Sprint and T-Mobile merging, industry pricing should be more rational going forward.
  • WarnerMedia holds a broad array of content rights and has a strong reputation with content creators. Shareholders will own 71% of this firm after it merges with Discovery.

Company Profile 

Wireless is AT&T’s largest business, contributing about 40% of revenue. The firm is the third-largest U.S. wireless carrier, connecting 66 million postpaid and 17 million prepaid phone customers. WarnerMedia contributes a bit less than 20% of revenue with media assets that include HBO, the Turner cable networks, and the Warner Brothers studios. AT&T plans to spin Warner off and merge it with Discovery to create a new stand-alone media firm. The firm recently sold a 30% stake in its traditional television business, which serves 15 million customers and generates about 17% of sales. This business will be removed from AT&T’s financials going forward. Fixed-line telecom services provided to businesses and consumers account for about 20% of revenue, serving about 15 million broadband customers.

(Source: Morningstar)

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State Street Performing Well, Driven by Asset Appreciation and New Client Wins

Assets under custody or administration grew to $43.3 trillion versus $42.6 billion in the previous quarter and $36.6 in the year-ago period, driven by market appreciation as well as new business wins. 

Fee revenue grew 9% from the year-ago period with servicing fees growing 7%. We attribute the bulk of the servicing fee growth to market appreciation with the remainder from net new business partially offset by fee compression. Assets under custody or administration grew 18% to $43.3 trillion with new servicing wins contribution $1.7 trillion, a healthy number in our view. Management fees grew 10% year over year and 4% sequentially. Money market fee waivers continue to be a headwind but appear to be moderating. Charles River Development, which the firm acquired in 2018, saw annualized recurring revenue growth of 12%.

The firm continues to manage expenses well with expenses down 1% sequentially and flat year-over-year excluding notable items and foreign exchange effects. Looking ahead, we think low-single-digit expense growth is more realistic as productivity growth is balanced with the need to invest in its business and some inflationary pressures.

Given the strong business momentum and equity market tailwinds, State Street raised its full-year outlook with just one quarter left. State Street now expects fee revenue to be up 5% for the year with servicing fee growth of 7.5%-8.5%. Net interest income is expected to be in the range of $475 million-$490 million for the fourth quarter, which implies $1.90 billion-$1.91 billion for the full year. The firm’s tax rate is expected to be on the low end of the 17%-19% range.

Company Profile

State Street is a leading provider of financial services, including investment servicing, investment management, and investment research and trading. With approximately $38.8 trillion in assets under custody and administration and $3.5 trillion assets under management as of Dec. 31, 2020, State Street operates globally in more than 100 geographic markets and employs more than 38,000 worldwide

 (Source: Morningstar)

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M&T Bank reported solid third quarter earnings; Aims to create value via acquisition with People’s United

efficient operations, and savvy acquisitions. The bank’s main stronghold is its commercial real estate operations in the northeast. M&T has a history of good underwriting and deep, on the ground relationships. M&T has also recently announced it will acquire People’s United Bank, further expanding its geographical reach in the northeast and its product offerings. We like the pricing of the deal and expected cost savings, and hope the acquisition will lead to some added organic growth in the future as well. 

M&T derives about two thirds of its income from net interest income, and with the bank’s cheaper deposit base, it is more sensitive to movements in interest rates. The remaining one third of revenue comes from non banking businesses like wealth management or deposit service fees. Much of the company’s loan book is composed of commercial loans.

The bank has an especially strong position within its commercial real estate operations in the northeastern United States. M&T has one of the largest CRE exposures under our coverage, and this has come under more scrutiny as the pandemic has developed. While certain CRE assets have come under unique pressure, M&T’s underwriting remains solid, and we expect losses to be very manageable.

M&T Bank reported solid third quarter earning; the acquisition and integration of People’s United remains the next catalyst for value creation for M&T Bank

M&T Bank reported solid third-quarter earnings. The bank beat the FactSet consensus estimate of $1.64 per share with reported EPS of $1.90. This equates to a return on tangible common equity of 17.5%. M&T Bank benefitted from a provisioning benefit once again as chargeoffs remain exceptionally low and the bank released some additional reserves.

Nonperforming assets remained stable. Expenses, however, came in a bit hotter than expected, up roughly 9% year over year during the quarter. Management attributed most of this to higher incentive based compensation, which is understandable. On the positive side, fees have done quite well.  Net interest income, meanwhile, was essentially in line with our expectations.

The acquisition and integration of People’s United remains the next catalyst for value creation for M&T Bank.

Key attraction of the transaction 

  • Unique strategic position and enhanced platform for growth: The merger will create the leading community-focused commercial bank with the scale and share to compete effectively.
  • Shared commitment to local communities: Both companies have been long recognized for their community commitments and longstanding support of civic organizations.
  •  Compelling financial impacts: M&T expects the transaction to be immediately accretive to its tangible book value per share. It is further expected that the transaction will be 10-12% accretive to M&T’s earnings per share in 2023, reflecting estimated annual cost synergies of approximately $330 million. 

Financial Strength 

We think M&T is in good financial health. The bank withstood the crisis better than peers and has maintained a credit cost advantage over the current economic cycle. Deposits fund roughly three fourths of total assets. We believe the bank is adequately capitalized, with a common equity Tier 1 ratio over 10% as of September 2021.

Bull Says

  • M&T’s acquisition of People’s United was at a good price and should drive additional future growth. 
  • A strong economy, higher inflation, and potentially higher rates are all positives for the banking sector and should propel results even higher. 
  • M&T has loyal customers, and good management, and investors shouldn’t have to worry much about being burned by bad underwriting.

Company Profile 

M&T Bank is one of the largest regional banks in the United States, with branches in New York, Pennsylvania, West Virginia, Virginia, Maryland, Delaware, and New Jersey. The bank was founded to serve manufacturing and trading businesses around the Erie Canal.

 (Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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PNC Remains on Track to Complete Most Expense Saves in 2021

the acquisition of RBC’s U.S. branch network in the Southeast, and by updating its core infrastructure and retail branch model. PNC has been very successful at organically expanding its customer base, both in commercial banking and now in retail. The expanding client base has led to solid loan, deposit, and fee income growth. Selling new products into the formerly underperforming RBC branch network has worked particularly well, and PNC now seems poised to repeat this effort with the pending acquisition of BBVA. The bank’s Midwest commercial growth strategy is paying dividends, and PNC will be attempting retail growth efforts in the same areas where commercial expansion was successful.

The successful acquisition history, seemingly successful expansion initiatives, and improved credit performance during the 2007 downturn makes PNC is one of the better operators we cover. PNC has executed on many expense-saving initiatives over the years, and management has been actively reinvesting many of these savings back in the business to stay ahead on the technology front.

Financial Strength:

The fair value of PNC Financial Services is USD 185.00, which is based on analyst’s assumption that the bank’s efficiency ratio eventually declines to about 52%, as management realizes operating leverage from infrastructure investments and the BBVA acquisition helps push efficiency for PNC to the next level. The dividend yield given by company has been very consistent year on year.

PNC is in good financial health. The bank weathered the energy downturn well, and energy loans make up a small percentage of the loan book. The bank has also weathered the COVID-driven downturn well. Most measures of credit strain remain quite manageable, and the bank’s history of prudent lending give us comfort with the risks here. PNC’s common equity Tier 1 ratio was at 10% as of June 2021, handily exceeding the bank’s targets. The capital-allocation plan remains standard for PNC, with 30% plus of earnings devoted to dividends, as much as necessary used for internal investment, and the left overs used for share repurchases.

Bulls Say:

  • PNC’s acquisition of BBVA seems likely to add value to the franchise and for shareholders, and will make PNC the regional bank with the most scale. 
  • A strong economy, higher inflation, and potentially higher rates are all positives for the banking sector and should propel results even higher. 
  • In additional to acquisitions, PNC has organic expansion opportunities it is taking advantage of, which could lead to higher organic growth than peers over time.

Company Profile:

PNC Financial Services Group is a diversified financial services company offering retail banking, corporate and institutional banking, asset management, and residential mortgage banking across the United States.

(Source: Morningstar)

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Coach’s Enduring Popularity Provides Stability as Tapestry Works Through Its Acceleration Program

Due to the pandemic, all three of Tapestry’s brands suffered sales and operating profit declines in parts of the last two fiscal years, but results have been improving rapidly as it implements its three-year Acceleration Program strategy to cut costs and improve margins. 

Coach struggled with excessive distribution and competition in the past, but we think Tapestry has turned it around through store closures, restrictions on discounting, and increased e-commerce, which has grown by triple-digit percentages during the pandemic. Further, we expect growth in complementary categories like footwear and fashion. China to be a key growth region for Coach as Chinese consumers will compose 46% of the worldwide luxury goods spending in 2025, according to Bain & Company. We forecast Coach’s greater China sales will increase to nearly $1.5 billion in fiscal 2031 (24% of sales) from $931 million in fiscal 2021 (22% of sales). 

The acquisitions of Kate Spade and Stuart Weitzman don’t contribute to Tapestry’s moat. Spade was a natural fit for Coach as both generate most of their sales from Asia-sourced handbags. However, Spade merchandise is priced lower than Coach and lacks its international reach. Still, we think Spade can grow in both North America and Asia through store openings and new products, such as shoes (currently licensed).As for Stuart Weitzman, while its women’s shoes achieve luxury price points, we view it as a niche brand (less than $300 million in fiscal 2021 sales) with fashion risk. Stuart Weitzman is struggling so much that Tapestry recently wrote off all the goodwill and intangibles related to its purchase and is downsizing its store base.

Financial Strength

As of the end of June 2021, Tapestry was in a net cash position, with total debt of $1.6 billion and $2 billion in cash and equivalents. Some (33.5% as of the end of fiscal 2021) of the cash is held outside of the U.S. but may be repatriated. Tapestry’s earliest debt maturity occurs in 2022, when $400 million in 3.0% notes come due. Tapestry suspended share repurchases and dividends to maintain liquidity during the pandemic but has resumed both in fiscal 2022. We forecast the firm will generate more than $5.3 billion in free cash flow to equity over the next five years, most of which will be returned to shareholders. Tapestry has limited the amount of cash returned to shareholders since 2015 due to the acquisitions of Stuart Weitzman and Kate Spade and debt covenants. However, Tapestry approved a new $1.0 billion buyback program in May 2019, a clear signal it will resume significant buybacks. Further, we forecast Tapestry will pay out roughly 38% of earnings over the next 10 years as dividends. Finally, we expect Tapestry’s capital expenditures will be relatively high on store openings, remodels, and e-commerce investments. 

Bulls Say

  • Coach is one of the share leaders in the profitable categories of handbags and other leather goods. Coach bags achieve better pricing than many others, allowing for gross margins around 70%. 
  • Coach is a popular brand among Chinese consumers and has room for growth. Bain & Company estimates these consumers will compose 46% of worldwide luxury good spending in 2025, up from 33% in 2018. 
  • Tapestry unveiled a new strategic plan in August 2020 called the Acceleration Program to reduce operating expenses by about 10%, enhance e-commerce, and close low-performing stores.

Company Profile

Coach, Kate Spade, and Stuart Weitzman are the fashion and accessory brands that comprise Tapestry. The firm’s products are sold through about 1,400 company-operated stores, wholesale channels, and e-commerce in North America (62% of fiscal 2021 sales), Europe, Asia (33% of fiscal 2021 sales), and elsewhere. Coach (74% of fiscal 2021 sales) is best known for affordable luxury leather products. Kate Spade (21% of fiscal 2021 sales) is known for colorful patterns and graphics. Women’s handbags and accessories produced 70% of Tapestry’s sales in fiscal 2021. Stuart Weitzman, Tapestry’s smallest brand, generates nearly all (99%) of its revenue from women’s footwear.

 (Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Blackstone Has Built Itself a Solid Reputation as a Go-To Firm in the Alternative Assets Segment

Business Strategy and Outlook

Blackstone has built a solid position in the alternative asset-management industry, utilizing its reputation, broad product portfolio, investment performance track record and cadre of dedicated professionals to not only raise massive amounts of capital but sustain the reputation it has built for itself as a “go-to firm” for institutional and high-net-worth investors looking for exposure to alternative assets. Unlike the more traditional asset managers, who have had to rely on investor inaction (driven by either good fund performance or investor inertia/uncertainty) to keep annual redemption rates low, the products offered by alternative asset managers can have lockup periods attached to them, which prevent investors from redeeming part or all of their investment for a prolonged period of time.

Financial Strength

Blackstone’s business model depends heavily on having fully functioning credit and equity markets that will allow its investment funds to not only arrange financing for leveraged buyouts and/or additional debt issuances for the companies it operates but cash out of them once they’ve run their course. The company entered 2021 with $5.7 billion in longer-term debt (on a principal basis) on its books, with 56% of that total coming due during 2030-50. The company also has a $2.25 billion revolving credit facility (which expires in November 2025) but had no outstanding balances at the end of June 2021.

Blackstone should enter 2022 with a debt/total capital ratio of 44%, debt/EBITDA (by our calculations) at 1.3 times, and interest coverage of more than 25 times. On the distribution front, share repurchases have been rare over the past decade, with the company repurchasing (net of issuances) less than $2 billion of stock (most of which was bought back in the past three calendar years). During the first half of 2021, Blackstone repurchased 3.2 million shares of common stock for $289 million. Dividend payments, meanwhile, exceeded $21 billion during 2011-20 and are expected to account for 85% of distributable earnings annually going forward.

Bulls Say’s

  • Blackstone, with $499 billion in fee-earning AUM at the end of June 2021, is a “go-to firm” for institutional and high-net-worth investors looking for exposure to alternative assets.
  • The company’s ever-increasing scale, diversified product offerings, long track record of investment performance and strong client relationships position the firm to perform well in a variety of market conditions.
  • Customer demand for alternatives has been increasing, with institutional investors in the category limiting the number of providers they use—both positives for Blackstone’s business model.

Company Profile 

Blackstone is one of the world’s largest alternative asset managers with $684 billion in total asset under management, including $499 billion in fee-earning asset under management, at the end of June 2021. The company has four core business segments: private equity (27% of fee-earning AUM, and 31% of base management fees, during 2020); real estate (32% and 39%); credit & insurance (25% and 15%); and hedge fund solutions (16% and 15%). While the firm primarily serves institutional investors (87% of AUM) it does serve clients in the high-net-worth channel (13%). Blackstone operates through 25 offices located in the Americas (8), Europe and the Middle East (9), and the Asia-Pacific region (8).

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Simon Property Group’s Class A Mall Portfolio Should Continue to Outperform Other Malls

manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon’s portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

E-commerce continues to pressure brick-and-mortar retail as consumers increasingly move their shopping habits online. However,physical retail sales growth will still be positive over the next decade. Retailers are becoming more selective with their physical locations, opting to locate storefronts in the highest-quality assets that Simon owns while closing stores in lower-quality malls. Additionally, many e-tailers are beginning to open stores in Class A malls to take advantage of the high foot traffic, as a physical presence provides additional marketing, a showroom for products they want to highlight, and another source of sales.

However, Simon is still dealing with the fallout of the coronavirus pandemic. Shopping at brick-and-mortar locations fell as some consumers shifted purchases to e-commerce platforms. While Simon’s revenue is somewhat protected by long-term leases, occupancy fell near 90% in 2020 and has only recently started to recover while rent still remains below prepandemic levels. We believe that Class A malls will rebound and that these high-quality malls will eventually return to their prior occupancy and rent levels, but the short-term impact to Simon’s cash flow has been significant.

Financial Strength

Simon is in good financial shape from a liquidity and a solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which we believe will serve stakeholders well. Simon has an A/A3 credit rating, so it should be able to easily access low-rated debt to service financial obligations. Debt maturities in the near term should be manageable through a combination of refinancing and significant free cash flow. Additionally, the company should be able to access the capital markets when development and redevelopment opportunities arise. We expect 2021 net debt/EBITDA and EBITDA/interest to be roughly 7.1 and 4.5 times, respectively. We expect the company’s credit rating to remain stable through steady net operating income growth in its existing portfolio. We think Simon has unrivaled access to capital markets in general, given its current strong balance sheet and a large, higher-quality, unencumbered asset base.

Bulls Says

  • Simon’s access to capital, scale, and validated record position the firm to execute on any attractive and available investment opportunities. 
  • Simon’s high-quality portfolio will continue to present attractive locations for tenants to place stores even as retail companies look to reduce store counts and present the most desirable locations for e-tailers looking to establish a physical presence. 
  • Simon’s mall and outlet portfolio contains a high percentage of the best malls in the country where redevelopment capital can be deployed at the most promising yields.

Company Profile

Simon Property Group is the second-largest real estate investment trust in the United States. Its portfolio includes an interest in 207 properties: 106 traditional malls, 69 premium outlets, 14 Mills centers (a combination of a traditional mall, outlet center, and big-box retailers), four lifestyle centers, and 14 other retail properties. Simon’s portfolio averaged $693 in sales per square foot over the past 12 months. The company also owns a 21% interest in Klepierre, a European retail company with investments in shopping centers in 16 countries, and joint venture interests in 29 premium outlets across 11 countries.

 (Source: Morningstar)

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Encouraging Signs from Telstra’s Investor Day

although the impact on high-margin roaming revenue was notable. The cost-out program is back on track, with management in February 2021 increasing the T22 cost-out target by the end of fiscal 2022 to AUD 2.7 billion, from AUD 2.5 billion previously. Telstra is the leading telecommunications services provider in Australia. It has dominant market share in each service category and customer segment, and enjoys cost advantages which underpin its narrow moat rating.

Telstra is not the cheapest provider of telecommunications services but is the lowest-cost provider resulting in earnings before interest, taxes, depreciation and amortisation, or EBITDA, margins of over 30%. As the National Broadband Network, or NBN, is rolled out, the traditional copper and cable networks will be progressively decommissioned. Compensation payments amount to an after-tax net present value of AUD 11 billion. Mobile market share of 44% remains well ahead of rivals Optus and Vodafone at 35% and 21% respectively. Competitive advantage in coverage and speed of the Telstra mobile network attracts customers demanding reliable mobile connectivity.

Financial Strength

Telstra’s balance sheet is strong. Net debt/EBITDA was 2.0 times at the end of June 2021, while EBITDA interest cover was 13.2 times. The strong capital position and cash flow allows spectrum acquisition and renewals, as well as network reinvestment, to be debt-funded.

Bulls Say’s 

  • Telstra has market-leading shares across all vital telecommunications segments and is likely to maintain these positions in the future.
  • While the telecommunications space is incredibly competitive, Telstra has a significant competitive advantage via its extensive mobile and wireless networks.
  • Decommissioning of the copper network lowers capital intensiveness of the business. Telstra can redirect capital to the higher-growth mobile segment.

Company Profile 

Telstra is Australia’s largest telecommunications entity, with material market shares in voice, mobile, data and Internet, spanning retail, corporate and wholesale segments. Its fixed-line copper network will gradually be wound down as the government-owned National Broadband Network rolls out to all Australian households, but the group will be compensated accordingly. Investments into network applications and services, media, technology and overseas are being made to replace the expected lost fixed-line earnings longer term, while continuing cost-cuts are also critical.

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Health and Human Services and Congressional Plans to CutDrug Prices Look Manageable by the Industry

Novartis is well positioned for steady long-term growth. Strong intellectual property supporting multi-billion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat. While patent losses on anemia drug Exjade and cancer drug Afinitor will weigh on near-term growth, a strong portfolio of drugs along with a robust pipeline should ensure steady long-term growth.

Novartis’ drug segment is poised for long-term growth driven by new pipeline products and existing drugs. Novartis’ strategy to focus largely in areas of unmet medical need should strengthen the firm’s pricing power. Additionally, Novartis differentiates itself by its sheer number of blockbusters, including Entresto for heart failure, Cosentyx for immunology diseases and Tasigna for cancer. Also, it has generated a strong late-stage pipeline with recent launches of migraine drug Aimovig and cancer drug Kisqali. Despite the patent losses on Exjade and Afinitor (and potentially multiple sclerosis drug Gilenya), the combination of a strong pipeline of new products and a diverse, well-positioned operating platform should translate into steady growth.

Financial Strength

Using estimates from the Congressional Budget Office for the impact of HR3, we previously estimated that U.S. branded drug sales could fall 21% below our current forecasts if international price benchmarking were applied to Medicare and private plans, with up to a 40% impact if such a system were applied to all drugs (the plan would likely only apply to a basket of drugs) and if drug firms were not able to offset these prices with international price increases. Based on our prior analysis of rebates in Medicaid and the VA, the impact of domestic reference pricing could also be sizeable, as high as 20%, if applied to all of Medicare (assuming no offsets).

Upcoming congressional proposals on lowering drug pricing as well as a recent plan from the Department of Health and Human Services have put U.S. drug pricing policy back in the spotlight. Congress is reconvening and will work to pass a $3.5 trillion budget reconciliation package, and Politico reported that House Democrats plan to include Medicare drug price negotiation (along with other elements of the HR3 bill, which was originally introduced and passed in the House in 2019) in their budget reconciliation package.

Company Profile 

Novartis AG develops and manufactures healthcare products through two segments: Innovative Medicines and Sandoz. It generates the vast majority of its revenue from Innovative Medicines segment consisting global business franchises in oncology, ophthalmology, neuroscience, immunology, respiratory, cardio-metabolic, and established medicines. The firm sells its products globally, with the United States representing close to one third of total revenue.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.